If you are new to trading, then you must get familiar with every determiner that will help you recognize trends. This way, you will learn how to invest and make your trading a lot more successful. One of the indicators that many traders resort to when they want to spot trends is Moving Averages (MA).
If you wish to find more about moving averages and the right way to use them in Forex trading, then you can continue reading. We make sure to provide all of the basics that you need to grasp the meaning of MA and the right way to use this indicator.
What is a Moving Average?
The moving average definition is ratther simple to grasp even by newbie traders. It describes MA as an indicator that can help you spot trends, their directions, or a flat market where the price is neither increasing, nor decreasing. Since MA is easy to use, it has become a popular indicator that many traders resort to when they trade Forex.
Often MAs are used for simple Forex trading strategies as they allow you to keep up with current trends and determine the support and resistance levels. The two most popular types of MAs are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA). SMAs represent the average price over a certain number of time slots. Meanwhile, EMAs mainly concentrate on the most recent prices. If you are interested in the way this indicator can help you in Forex trading, you can take a look at this video explaining how to use the moving averages.
How to Use Simple Moving Averages in Forex Trading?
If you take for example a 20-day SMA, you will need the closing price for the last 20 days, which should then be divided by 20. This will express the SMA that will indicate whether a price is in a downtrend or uptrend. The SMA is typically represented by a line that follows the price fluctuations during several time periods. The shorter the period of the SMA is, the closer the line will be following the ups and downs of the price.
Simply following one SMA, however, can be deceiving and often may not be the best indicator of a trend in Forex trading. To be able to get a good idea of the trend of a currency pair, it is recommended to compare at least several SMAs that cover different lengths of time.
A popular Forex trading strategy is to base a trend on MAs for 4, 9, and 18 time periods. This helps traders to determine the moving direction of the trend, instead of basing it on a single SMA indicator. The SMAs are used to indicate entry/exit signals and determine support and resistance levels.
For the entry, the buy/sell signal is indicated when the SMA for 4 periods crosses the line of the 9-period SMA and then both of these indicators cross together the SMA line for the 18 time periods. The buy/sell signal is strong when the MA is sharp but if the SMAs for 4 and 9 time periods just drift above the 18-period SMA, then the buy/sell signals are weak.
You can use the SMAs to indicate the exit signal. The time when the 4-period and 9-period SMAs recross might be the right exit point for you but other traders prefer to wait when a certain trend starts to move drastically in the opposite direction.
How to Use Exponential Moving Averages in Forex Trading?
Similar to the strategy of using SMAs indicators, when you want to use EMAs in your Forex trading, it is recommended to base your decisions on a double EMA. This MA combination should consist of a short-term and a long-term EMA. Whenever the shorter EMA crosses the long-term EMA, this indicates a trading signal.
A simple example of the aforementioned strategy is using a 30-day EMA for the short-period indicator and a 100-day EMA for the longer period. Whenever the short-period line crosses above the 100-day EMA, the trader would buy. Meanwhile, when the trend moves the opposite way and the short-term EMA crosses below the 100-day EMA indicator, the trader would sell.
Often, MA indicators are paired with other tools that enable traders to follow trends and make decisions while trading Forex. You can use short-term and long-term EMAs in a combination with the Bollinger Bands that provide trading signals, helping you to recognize breakout trends.
If the price has a breakout point above the envelope plotted by the Bollinger Bands, then this indicates a buy signal. If you use a strategy that combines this indicator with EMAs, however, you should buy only if the EMAs also agree with the same direction of the trend. This means that the short-term EMA should cross above the long-term EMA.
The opposite action is advised when the breakout point is below the Bollinger Bands and the short-term EMA crosses below the long-term EMA. Combining the two indicator tools is a strategy that many traders utilize when they wish to have a better understanding of trends and trade successfully in Forex.